F I L E D

United States Court of Appeals

Tenth Circuit

July 24, 2007

PU BL ISH

Elisabeth A. Shumaker
Clerk of Court

UNITED STATES COURT O F APPEALS

TENTH CIRCUIT

IN RE LARR Y LEE WO O D Y ,
Debtor.

LA RRY LEE WO O D Y ,
Plaintiff-Appellee,

No. 06-3294

v.
U N ITED STA TES D EPA RTM ENT
OF JUSTICE,
Defendant-Appellant.

Appeal from the United States Bankruptcy

Appellate Panel of the Tenth Circuit
(B.A.P. No. K S-05-124)

Jonathan H. Levy, Attorney, Department of Justice (Peter D. Keisler, Assistant

Attorney General; Eric F. M elgren, United States Attorney; and Robert M . Loeb,
Department of Justice Attorney, with him on the briefs), W ashington, D.C., for
Defendant-Appellant.
Kenneth M ichael Gay, Consumer Advocate, L.L.C., Lenexa, Kansas, for PlaintiffAppellee.

Before BRISCO E, EBEL, and H ARTZ, Circuit Judges.

EBEL, Circuit Judge.

The United States Department of Justice (the DOJ) appeals a judgment of

the United States Bankruptcy Appellate Panel for the Tenth Circuit (BAP)
affirming the District of Kansas Bankruptcy Courts discharge of Larry Lee
W oodys H ealth Education and Assistance Loan (HEAL loan) debt. Pursuant to
42 U.S.C. 292f(g), HEAL loan debt may be discharged only if nondischarge of
the debt would be unconscionable.
The DOJ argues that the bankruptcy court erred in concluding that it would
be unconscionable to deny M r. W oody a discharge of his HEAL loan debt. W e
agree. Under the correct standard for dischargeability, M r. W oody failed to
demonstrate that nondischarge of his HEAL loan would be unconscionable. W e
therefore REVERSE the B APs judgment affirming the bankruptcy courts
discharge of M r. W oodys HEAL loan and order the full amount of his remaining
HEAL loan obligation reinstated.
I.

B ACKGR OU N D
A.

Factual H istory

M r. W oody accrued significant debt from two types of government-insured

student loans he obtained between 1979 and 1983 as he pursued a degree in
chiropractic medicine. Of his original loan obligations, $25,000 consisted of
general educational loans whose dischargeability is governed by the Bankruptcy

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C ode at 11 U .S.C . 523(a)(8) (the 523 loans), and $4,700 consisted of a HEAL
loan subject to a separate dischargeability standard under 42 U.S.C. 292f(g). 1
M r. W oodys loan payments began to come due after he left his chiropractic
studies in 1983; however, to date, he has contributed only $995 towards the
repaym ent of his 523 loans and only one payment of $484.48 toward his HEAL
loan. As a result of accrued interest and his failure to make regular payments on
these loans, as of July 2005 M r. W oody owed a total of over $53,000 on the 523
loans (with interest continuing to accrue at 7% annually) and over $18,750 on the
HEAL loan (w ith interest accruing at 4.55% annually).
M r. W oody holds an undergraduate degree in accounting. However, he
never completed his chiropractic degree and, as a result, has never worked as a
chiropractor. After discontinuing his chiropractic studies in 1983, he worked in
mostly temporary and seasonal positions, generally earning less than $15,000
annually and collecting unemployment benefits at times. In 2001, he obtained
seasonal employment with the I.R.S., and between 2001 and 2004, his annual
gross income increased from $17,428 to $27,143. 2 In 2004, he accepted a full1

W hile 523 loans can be used to pay for educational expenses in any field,
see 11 U.S.C. 523(a)(8)(A), (B), HEAL loans are available only for educational
expenses incurred in the pursuit of a degree in the field of health or medicine,
such as a chiropractic degree. See 42 U.S.C. 292o(1).
2

Figures for M r. W oodys earnings and his budget are quoted from the
bankruptcy court, which in turn gleaned the figures from an overview of the
record and M r. W oodys testimony, which the Court finds credible. In re
(continued...)
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time position at the I.R.S., and his annual gross income increased accordingly to
an estimated $36,780 in 2005 and $38,520 in 2006. 3 In his current I.R.S.
position, M r. W oody receives subsidized health insurance as well as access to a
flexible medical spending account (an FSA) and a 401(k) retirement plan.
The bankruptcy court set out a detailed estimated monthly budget of M r.
W oodys expenses for 2005 and 2006, based on his testimony and an overview of
the record. The court found that M r. W oody had an estimated gross monthly
income of $3,065 in 2005, and of $3,210 in 2006. The court also found that the
following expenses were deducted from his paycheck each month:

Taxes and Social Security

Insurance
Flexible Spending Account
Federal Retirement
401(k)
Union Dues
TSP Loan
TOTAL:

2005
$655.00
137.00
72.00
24.00
210.00
26.00
85.00

2006
$700.00
163.00
125.00
26.00
221.00
26.00
85.00

$1,209.00

$1,346.00

Factoring in these deductions from his paycheck, M r. W oodys estimated takehome pay each month w as $1,856 in 2005, and $1,864 in 2006. The court also

(...continued)
W oody, 335 B.R. 431, 436 (Bankr. D. Kan. 2005). Neither party contests these
figures.
3

The bankruptcy court estimated M r. W oodys 2005 and 2006 earnings,

since the courts opinion was issued just prior to the end of 2005.
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described M r. W oodys estimated monthly living expenses, culled from

documents he submitted to the court:

Apartment Rent
[Storage Rental]
Electricity
Natural Gas
W ater/Sewer
Cable/Satellite/Internet
Telephone
Food
Clothing/Bedding
Laundry
M edical & Dental After Reimbursement
Personal Grooming
Recreation/Entertainment
Car Payment
Gasoline
Auto Repairs/M aintenance
Auto Insurance/Road Service
Auto Licenses/Personal Property Tax
Renters Insurance
Health/Dental/Vision Insurance
Charitable Contributions
Office Supplies/Bank Charges
Interest Expense
Union Dues
Installment/Credit Card Payments
TOTAL:

2005
$585.00
125.00
50.00
0.00
20.00
17.00
80.00
200.00
30.00
25.00
128.00
13.00
75.00
125.00
80.00
70.00
42.00
6.00
15.00
60.00
25.00
17.00
9.00
4.00
100.00

2006
$595.00
125.00
55.00
0.00
20.00
17.00
80.00
200.00
30.00
25.00
75.00
15.00
95.00
125.00
90.00
70.00
42.00
6.00
15.00
60.00
25.00
20.00
0.00
0.00
0.00

$1,901.00

$1,785.00

Based on this budget, M r. W oody earned an insufficient am ount to cover his

monthly expenses in 2005, but managed to earn a meager surplus of $79 per
month in 2006.

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M r. W oody was 58 years old at the time of his bankruptcy proceedings in

2005 and had saved what the bankruptcy court characterized as a pittance
towards his future retirement expenses. 4 He owned no real property, and his only
personal property of significant value was a fifteen-year-old pickup truck with a
rebuilt engine. The state of M r. W oodys health was not exemplary: he has heart
disease and suffered a heart attack in 2000 which cost approximately $67,000 in
medical expenses and precipitated his filing for bankruptcy.
B.

Procedural H istory

In 2002, M r. W oody filed for Chapter 7 bankruptcy and sought discharge of

all of his student loan obligations. On July 12, 2005, the bankruptcy court held a
hearing to determine the dischargeability of the 523 loans and the HEAL loan.
Discharge of 523 loans is governed by the undue hardship standard at 11 U.S.C.
523(a)(8), which provides that such loans may not be discharged unless
excepting such debt from discharge . . . would impose an undue hardship on the

Exactly how much M r. W oody had accumulated for retirement expenses is

unclear from the record, although the amount is unquestionably small. M r.
W oody testified that his thrift savings plan (TSP) account a type of
retirement savings account offered to federal employees held a balance of
approximately $7,500, and that he also held two IRA accounts one traditional
and one Roth IRA with balances of approximately $5,000 and $2,500,
respectively. However, in making its oral findings of fact, the bankruptcy court
stated that it found M r. W oodys retirement savings to be in the $10,000 range.
The bankruptcy appellate panel, in contrast, stated M r. W oodys retirement
accounts to be w orth approximately $3,000. For purposes of our analysis, w e
simply note that M r. W oody has saved an amount incapable of supporting him
during his retirement.
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debtor and the debtors dependents . . . . (Emphasis added). In contrast,

discharge of the HEAL loan is governed by the unconscionability standard at 42
U.S.C. 292f(g):
Notwithstanding any other provision of Federal or State law, a debt that
is a loan insured under the [H EA L loan program] may be released by a
discharge in bankruptcy under any chapter of Title 11, only if such
discharge is granted - (1) after the expiration of the seven-year period beginning on the first
date w hen repayment of such loan is required, exclusive of any period
after such date in which the obligation to pay installments on the loan
is suspended;
(2) upon a finding by the Bankruptcy Court that the nondischarge of
such debt would be unconscionable; and
(3) upon the condition that the Secretary shall not have waived the
Secretarys rights to apply subsection (f) of this section to the borrower
and the discharged debt. 5
(Emphasis added). The parties stipulated that parts (1) and (3) of 292f(g) were
satisfied; thus, the only question before the bankruptcy court regarding the HEA L
loan was whether nondischarge of the loan would be unconscionable.
Addressing discharge of M r. W oodys 523 loan first, the court noted that
the Tenth Circuit has adopted the Second Circuits three-part Brunner test
defining undue hardship. Educ. Credit M gmt. Co. v. Polleys, 356 F.3d 1302,
1309 (10th Cir. 2004) (adopting the reasoning of Brunner v. New York State
Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987)). The
Brunner test holds that the undue hardship standard requires a debtor to prove:
5

42 U.S.C. 292f(f) requires the Secretary to reduce federal

reimbursements or payments for health services to practicing health care
professionals who have defaulted on their HEAL loan obligations.
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(1) that the debtor cannot maintain, based on current income and
expenses, a minimal standard of living for herself and her dependents
if forced to repay the loans;
(2) that additional circumstances exist indicating that this state of
affairs is likely to persist for a significant portion of the repayment
period of the student loans; and
(3) that the debtor has made good faith efforts to repay the loans.
Polleys, 356 F.3d at 1307. Based on the Brunner factors, the court extensively
analyzed M r. W oodys income and expenses and concluded that he would suffer
undue hardship if his 523 loans were not discharged. The court found that M r.
W oody barely maintains a minimal standard of living in light of his current
budget; his financial condition was likely to persist, as his future holds greater
hardship as his earning capacity diminishes and his medical expenses increase;
and he has been trying his best in good faith to maximize his personal and
professional resources, but . . . circumstances beyond his control have kept him
from repaying his student loans. The court therefore ordered discharge of M r.
W oodys 523 loan debts, including accrued interest.
The bankruptcy court then conducted a much shorter analysis of whether
292f(g)s unconscionability standard permitted discharge of M r. W oodys $18,750
of accrued HEAL loan debt. The court noted that many of this Courts findings
under the Brunner test are equally applicable under an unconscionability
analysis, and therefore its discussion of the HEAL loan reiterated many points
the court made in regard to the 523 loan discharge. Indeed, the headings in the
courts discussion of the HEAL loan mirrored the three Brunner factors for
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undue hardship, focusing on M r. W oodys [a]ccumulated wealth, income and

ability to pay, his [a]ge, health, prospects and efforts for increased earnings,
and his good faith in finding that nondischarge of his HEAL loan debt would be
unconscionable. Accordingly, the bankruptcy court concluded that M r. W oody
has satisfied his burden and is entitled to discharge, in their entirety, both the 523
Loan and the HEAL Loan. 6
The United States Department of Education (DOE) as creditor on the 523
loans, along with the DOJ as creditor on the HEAL loan, both appealed from the
bankruptcy courts order. On appeal, the B AP affirmed the bankruptcy courts
reasoning in its entirety and upheld the discharge of both the 523 loans and the
HEAL loan.
Only the DOJ filed an appeal from the BAPs opinion affirming the
bankruptcy courts order; thus, only the discharge of M r. W oodys H EAL loan is
6

The bankruptcy court first announced its findings and conclusions verbally
at the close of the July 12, 2005 hearing. At that time, the court ordered M r.
W oodys 523 loans discharged in their entirety, but ordered only the accrued
interest on his HEAL loan discharged, leaving the principal HEAL debt of $4,700
still due. However, the court also reserve[d] the right to write a written decision
to more accurately reflect any additional findings of fact and conclusions of law.
On December 15, 2005, the bankruptcy court exercised this reserved right
and issued a written order. The written order reiterated and expanded upon the
courts previous findings of fact and most of its conclusions of law but amended
its judgment to order full discharge of both the principal and accrued on M r.
W oodys HEAL loan, stating that the nondischarge of any portion of M r.
W oodys HEAL obligation would be unconscionable. The written order
represents the bankruptcy courts final judgment, and thus our summary focuses
on that order rather than the courts preliminary oral findings and conclusions.
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at issue in this appeal. W e have jurisdiction over this appeal pursuant to 28

U.S.C. 158(d).
II.

D ISC USSIO N
This court has not previously addressed the unconscionability standard for

discharge of HEAL loans under 42 U.S.C. 292f(g). The Fourth and Sixth
Circuits, however, have addressed this standard and have provided a wellconsidered analytical framew ork for determining when discharge of a HEAL loan
is permitted under 292f(g)s strict language. W e join our sister circuits in
adopting this framew ork, which involves analysis of the totality of the debtors
circumstances. It is clear that Congress intended to invoke a stricter standard for
discharge of HEAL loans than for the discharge of 523 loans. W hile we agree
that M r. W oody faces an uncertain financial future after his retirement, his
present level of income and his apparent lack of repayment efforts over the life of
the HEAL loan despite the availability of funds from which at least minimal
payments could have been made convince us that he does not qualify for
292f(g)s rigorous discharge standard. W e therefore reverse the BAPs judgment
and the bankruptcy courts order discharging his outstanding HEAL loan
obligations.
A.

Standard of Review

Although this appeal is from a decision by the BAP, our focus on review is
upon the bankruptcy courts decision. In re Alderete, 412 F.3d 1200, 1204 (10th
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Cir. 2005); accord In re M idkiff, 342 F.3d 1194, 1197 (10th Cir. 2003). W e
review the bankruptcy courts factual findings for clear error. In re Commercial
Fin. Servs., Inc., 427 F.3d 804, 810 (10th Cir. 2005). However, we review de
novo the bankruptcy courts resolution of questions of law, including the meaning
of the term unconscionable. See U.S. Dept of Health & Human Servs. v.
Smitley, 347 F.3d 109, 116 (4th Cir. 2003); see also In re M idkiff, 342 F.3d at
1197 (W here . . . [t]here are no factual disputes and the issues on appeal pertain
to the proper application of bankruptcy statutes and the interpretation of case law ,
our review is de novo.(alterations in original)).
B.

The unconscionability standard for discharge of HEAL loan

obligations pursuant to 42 U.S.C. 292f(g)

It has now been more than ten years since the Sixth Circuit became the first
federal court of appeals to consider 292f(g)s unconscionability standard for
discharge of HEAL loans. See In re Rice, 78 F.3d 1144 (6th Cir. 1996). That
courts analytical framew ork was drawn from the prevailing approach of district
and bankruptcy courts, see In re Barrows, 182 B.R. 640, 650 (Bankr. D.N.H.
1994); In re M alloy, 155 B.R. 940, 945 (E.D. Va. 1993); In re Emnettt, 127 B.R.
599, 602 (Bankr. E.D. Ky. 1991), and has since been adopted by the only other
circuit court to consider the issue, see Smitley, 347 F3d at 116-17.

W e find the

approach of these courts reasonable and we therefore join them in applying a

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totality of the circumstances approach to the discharge of a HEAL loan

pursuant to 292f(g).
In requiring that HEAL loans may only be discharged when the
nondischarge of such debt would be unconscionable, Congress did not provide a
definition of unconscionability. 42 U.S.C. 292f(g). Courts interpreting this
requirement have therefore applied the Supreme Courts maxim that [i]n the
absence of an indication to the contrary, words in a statute are assumed to bear
their ordinary, contemporary, common meaning. Smitley, 347 F.3d at 116
(quoting W alters v. M etro. Educ. Enters., Inc., 519 U.S. 202, 207 (1997)
(alteration in original)); see In re Rice, 78 F.3d at 1149. As such,
unconscionable has been defined as excessive, exorbitant, lying outside
the limits of what is reasonable or acceptable, shockingly unfair, harsh, or
unjust, or outrageous. Smitley, 347 F.3d at 116 (quoting W ebsters Third New
International Dictionary 2486 (1993)); In re Rice, 78 F.3d at 1149; see also
M atthews v. Pineo, 19 F.3d 121, 124 (3d Cir. 1994) (adopting an identical
definition of unconscionable as applied in a statute regulating discharge of
other federally insured loans).
Other courts are also unanimous in finding the standard imposed by this
definition of unconscionability to be significantly more stringent than the
undue hardship standard established for the discharge of 523 loans. In re Rice,
78 F.3d at 1149; accord Smitley, 347 F.3d at 116-17; United States v. W ood, 925
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F.2d 1580, 1583 (7th Cir. 1991). Further, courts are similarly unanimous that the
burden to show unconscionability is a heavy one and is placed squarely upon the
debtor. Smitley, 347 F.3d at 117; In re Rice, 78 F.3d at 1149.
W ith these principles in mind, it is apparent that a single test cannot
reasonably take into account all of the considerations relevant to a determination
of unconscionability in every case. Thus, we agree with the Fourth and Sixth
Circuits that bankruptcy courts should examine the totality of the facts and
circumstances surrounding the debtor and the obligation to determine whether
nondischarge of the obligation would be unconscionable. In re Rice, 78 F.3d at
1149; accord Smitley, 347 F.3d at 117. Factors which these courts have
recognized as relevant in this analysis include (1) the debtors income, earning
ability, health, educational background, dependents, age, accumulated wealth, and
professional degree, In re Rice, 78 F.3d at 1149; (2) the debtors claimed
expenses and standard of living, with a view toward ascertaining whether the
debtor has attempted to minimize the expenses of himself and his dependents,
id.; (3) w hether the debtors current situation is likely to continue or improve,
including whether the debtor has attempted to maximize his income by seeking
or obtaining stable employment commensurate with his educational background
and abilities, and whether the debtor is capable of supplementing his income
through secondary part-time or seasonal employment, even if already employed
full time, id. at 1149-50; (4) whether the debtors dependents are, or could be,
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contributing financially to their own support, id. at 1150; (5) the amount of the
debt and the rate at which interest accrues, id. at 1149; and finally, (6) the
debtors good faith, i.e. his role in allowing the debt to accrue including
previous efforts to repay the HEAL obligation, including the debtors financial
situation over the course of time w hen payments were due; the debtors voluntary
undertaking of additional financial burdens despite his knowledge of his
outstanding HEAL debt; and the percentage of the debtors total indebtedness
represented by student loans, id. at 1150.
This list, of course, is not exclusive, and bankruptcy courts should consider
any additional factors arising in a given case that affect the determination of
whether nondischarge would be shockingly unfair, harsh, or unjust, or otherwise
unconscionable. In addition, we recognize the concern expressed by the
dissenting judge in Smitley and the bankruptcy court in this case that lists of
relevant factors can sometimes obscure the true function of a totality of the
circumstances analysis by reducing it to a rigid, formula-driven calculation.
Smitley, 347 F.3d at 125 (M ichael, J., dissenting); see Polleys, 356 F.3d at 1309
(Legal rules have value only to the extent they guide primary conduct or the
exercise of judicial discretion. Laundry lists, which may show ingenuity in
imagining what could be relevant but do not assign weights or consequences to
the factors, flunk the test of utility.). W e caution, therefore, that courts should
take care to view the debtors situation as a whole, assigning more importance to
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those factors the court determines to carry greater weight in a given debtors
circumstances.
Nevertheless, a court may not utilize its discretion to overcome Congresss
requirement that debtors seeking discharge of HEAL loans meet a strict
unconscionability standard. Given the extreme nature of Congress chosen
standard for the discharge of H EAL loans, we believe that in all but the most
difficult cases the question of whether the debtor has satisfied that standard will
be obvious. In re Rice, 78 F.3d at 1150; see also id. at 1148 ([W ]e have little
doubt that [Congress] intended to severely restrict the circumstances under which
a HEAL loan could be discharged in bankruptcy.).
C.

Factors relevant to the discharge of M r. W oodys H EAL loan

obligation

Consistent with the approach set out above, in this section we consider
individually the factors related to M r. W oodys situation that we find relevant to
whether nondischarge of his HEAL loan would be unconscionable. W e then
synthesize these factors to address the totality of the circumstances in the
following section. By doing so, we have endeavored to ensure that our analysis is
tailored to M r. W oodys situation as a whole and not merely a rigid, formuladriven calculation. Smitley, 347 F.3d at 125 (M ichael, J. dissenting).
1.

M r. Woodys income, earning ability, educational background,

and accumulated wealth

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M r. W oodys financial situation, both currently and over the years since his
loan payments first became due, carries great weight in determining whether his
HEAL loan may be discharged. The bankruptcy court found that, although M r.
W oodys income varied in the past, it has increased markedly since he became
employed by the I.R.S. in 2001; from an annual income that exceeded $15,000 in
only a few years prior to 1998, M r. W oodys earnings have steadily increased,
reaching a projected gross income of $36,780 in 2005 and $38,520 in 2006. M r.
W oody also receives significant benefits from the I.R.S. in addition to his salary,
including subsidized health insurance, 401(k) and TSP retirement savings
programs, and access to a flexible spending account for his medical expenses.
As for M r. W oodys educational background, he holds a bachelors degree
with a major in accounting and a minor in general business. His undergraduate
education has apparently proven useful, at least in the later years of his
professional life, as his successful employment with the I.R.S. appears to utilize
the training and skills of his degree. He has not, however, accumulated
significant wealth or many possessions; his retirement accounts contain
approximately $10,000, he owns no real estate, and his sole personal possession
of any value is his fifteen-year-old pickup truck.
W e therefore observe that M r. W oody appears to have an adequate earning
capacity at present; with no dependents to support, he is able to utilize his entire
annual income of nearly $40,000 to provide for his own needs. W e recognize,
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however, that these circumstances have not alw ays existed, and specifically
recognize that, prior to 1998, M r. W oody earned significantly less than he did at
the time of the bankruptcy courts judgment.
2.

M r. Woodys age and health

Another important factor in our calculus is the fact that M r. W oody is

approaching retirement age and suffers from a heart condition. M r. W oody was
58 years old at the time of his bankruptcy trial, which would make him now
closer to 60. As the bankruptcy court noted, he is not a shining example of good
health, as he has heart disease and the medical fall-out associated with a recent
heart attack. M r. W oody also testified that he has conditions affecting use of his
feet and hands, although these are not so significant as to prevent him from
working.
His age and health conditions separate M r. W oody from the debtors in Rice
and Smitley, who were aged 41 and 47 respectively and were thus relatively
young as well as healthy. In re Rice, 78 F.3d at 1150; Smitley, 347 F.3d at 122.
On the other hand, M r. W oodys health is not presently so impaired as to interfere
with his ability to maintain full time employment at the I.R.S.; the bankruptcy
court found that M r. W oody is able to work and his job does not exacerbate his
health issues, although he cannot work overtime without risking adverse health
effects. See In re Barrows, 182 B.R. at 647-49 (noting debtors numerous
physical problems, but refusing to discharge student loans including HEAL loans
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because not only must the debtors physical, mental or financial limitations be
permanent, they must be severe enough to prevent the obtainment of
employment.); In re Soler, 261 B.R. 444, 460-64 (Bankr. D. M inn. 2001)
(discharging debtors HEAL loans, in part because chronic, acute back pain was
exacerbated by her job as a dentist and meant that she could not work more hours
or hope to increase her income); In re Kline, 155 B.R. 762, 768 (Bankr. W .D. M o.
1993) (discharging debtors HEAL loans, in part because of severe mental illness
which render[ed] her unable to function on a day-to-day basis and prevent[ed]
her from maintaining employment for any significant time.).
M r. W oodys age and health do not appear to significantly affect his
present earning abilities. However, these circumstances are also relevant to
whether his current situation is likely to continue or improve, a factor we consider
next.
3.

Whether M r. Woodys current situation is likely to continue or

improve

The bankruptcy court found that M r. W oodys financial situation, though

stable now, is likely to deteriorate in the future due to his age and health
problems. This finding is supported by the evidence of M r. W oodys ongoing
health issues related to his heart condition and the fact that he is rapidly
approaching typical retirement age.

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W e note, however, that M r. W oody also conceded in his testimony that he

can probably expect to receive annual increases in his salary based on the
federal pay scale for the next couple of years at least, as well as annual cost-ofliving increases for as long as he remains at his I.R.S. position. Thus, while his
long-term financial outlook remains uncertain, M r. W oody can at least anticipate
a stable or even increased salary in the immediate future.
M r. W oodys financial outlook has already improved in another important
sense: his accrued debt of over $53,000 from his 523 loans was discharged by the
bankruptcy court, a decision that has not been appealed and is now final. W e
regard this discharge as a significant factor in assessing M r. W oodys financial
future, since it eliminated more than three-quarters of his educational debt. M r.
W oody now faces much less daunting payments than he would have if he was
required to repay his entire debt. 7 See Smitley, 347 F.3d at 123 (holding that the
fact that Smitleys financial condition has improved because he has received a
discharge of other debts weighed in favor of nondischarge of his HEAL loan
obligations).
4.

M r. Woodys expenses and his standard of living

The Rice and Smitley courts considered the amount of educational loan
debt as a separate factor in their HEAL loan discharge analyses. See In re Rice,
78 F.3d at 1149; Smitley, 347 F.3d at 123. In our analysis of M r. W oodys
circumstances, however, we believe that the amount of outstanding loan debt is
most important insofar as it affects his future prospects, and therefore we include
it here as an element of whether his situation is likely to improve.
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Viewed on a general level, we are inclined to agree with the bankruptcy

court that M r. W oody has maintained a reasonably frugal lifestyle and cannot be
faulted for living extravagantly in the face of his mounting educational loan debt.
However, to comport with the strict standard for discharge of HEAL loans under
292f(g)s unconscionability test, we must necessarily be unforgivingly critical
in [our] assessment of the debtors claimed expenses. In re Rice, 78 F.3d at
1151. Casting a careful eye over M r. W oodys budget, we cannot help but
conclude that he currently makes monthly payments and, in some cases, has
been making these payments for many years that are unnecessary to satisfy his
basic living needs. W e do not include M r. W oodys expenditures on, for
example, recreation/entertainment, or cable/satellite/internet as unnecessary
expenses; we agree with the bankruptcy court that people are not robots and
require at least minimal opportunity for recreation and relaxation. Even so, we
agree with the DOJ that certain of M r. W oodys expenses are not so necessary as
to take precedence over his obligation to repay his HEAL loan obligation.
First and foremost, M r. W oodys budget includes $125 expended each
month for rental of a storage space in which he stores furniture and office
equipment. M r. W oody claims to have rented this storage space since
approximately 1990, and he conceded at his hearing that he has not used the
furniture or equipment in storage since that time. He also conceded that the items
in storage were worth very little, and that the only reason he kept the items in
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storage was because it takes a certain amount of effort to clean [the storage unit]
out and get rid of it. By any standard, this expense is entirely unnecessary; had
M r. W oody simply disposed of his unused furniture in 1990, he could have been
contributing the monthly rental expense to his student loan debt instead and could
have paid off a significant portion of his educational loan obligations. 8 This
single expense therefore indicates that M r. W oodys income, even before he
obtained steady employment at the I.R.S., allowed for at least some repayment of
his education loan debt without infringing upon his standard of living.
A second category of monthly expense that has been unnecessary to M r.
W oodys maintenance of a minimal standard of living is his contribution to his
retirement savings accounts. To be sure, we agree with the principle that saving
for ones retirement is a laudable goal that should generally be encouraged.
However, we also agree with the many other courts that have held that, in the
context of bankruptcy proceedings, retirement contributions should not take
precedence over repayment of preexisting debts. Voluntary contributions to
retirement plans . . . are not reasonably necessary for a debtors maintenance or
support and must be made from disposable income. . . . [A]lthough investments
may be financially prudent, they certainly are not necessary expenses for the
8

The record does not indicate w hether the cost of M r. W oodys storage unit
has been $125 per month since 1990, or w hether that expense has increased with
time. Regardless, however, it represents a significant amount of income that
could have been directed towards repayment of M r. W oodys loans without
affecting his standard of living in the slightest.
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support of the debtors or their dependents. Investments of this nature are

therefore made with disposable income; disposable income is not what is left after
they are made. In re A nes, 195 F.3d 177, 180-81 (3d Cir. 1999); accord In re
Harshbarger, 66 F.3d 775, 778 (6th Cir. 1995) ([I]t would be unfair to the
creditors to allow the Debtors in the present case to commit part of their earnings
to the payment of their own retirement fund while at the same time paying their
creditors less than a 100% dividend. (quotation omitted)); In re Perkins, 318
B.R. 300, 306-07 (Bankr. M .D.N.C. 2004) (holding that 401(k) contributions
generally are not regarded as reasonably necessary for the support or maintenance
of a debtor and thus may be considered as available income from which a debtor
seeking a 523(a)(8) undue hardship discharge could use to repay an educational
loan and collecting supporting cases).
M r. W oodys 2005 budget included $210 per month in pre-tax contributions
to his 401(k) retirement plan. In addition, he budgeted $85 per month towards
repayment of a $2,500 thrift savings plan (TSP) loan which he had obtained in
the year prior to his loan discharge hearing; M r. W oody explained that he took
out the TSP loan in order to place more money in his IRA accounts in order to
benefit from the increased investment flexibility in those accounts, a decision that
was entirely discretionary on his part. Thus, between these two expenses, M r.
W oody pays $295 per month towards voluntary retirement contributions. W hile
these payments will no doubt benefit M r. W oody in the long run, they represent
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expenses that should not have taken precedence over his obligation to repay his
HEAL loan.
In addition, we note that there are other sundry expenses in M r. W oodys
monthly budget that, while perhaps individually de minimis, nevertheless appear
unnecessary to maintenance of his standard of living. For example, M r. W oody
testified that he voluntarily pays approximately $26 per month for additional life
insurance beyond that provided by his employer, yet he has no dependents or
spouse to benefit from such additional insurance. He pays $26 per month in
union dues, though he is not required to belong to a union as part of his work. H e
budgets $25 each month tow ards charitable contributions. And finally, M r.
W oodys 2006 estimated budget predicted a monthly surplus of $79 after paying
all budgeted expenses income that is earmarked for no particular purpose and,
thus, could certainly be used to make payments towards his HEAL loan debt.
The bankruptcy court similarly concluded that several of M r. W oodys
monthly expenses were unnecessary to maintenance of his standard of living.
However, the court also found that M r. W oodys estimates of many of his
necessary expenses were unrealistically low, and that the true cost of living
would eventually force M r. W oody to redirect his income tow ards these necessary
expenses. For example, the court noted that M r. W oody had not budgeted for
miscellaneous expenses or unexpected health care expenses, nor had he factored
in the likelihood that he would need to replace his aging vehicle in the future.
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According to the bankruptcy court, [r]aising M r. W oodys unrealistically low

estimated expenses to realistic levels w ill ultimately deprive him of the ability to
continue making payments toward voluntary expenses that are unnecessary for
him to maintain his minimal, if not meager, lifestyle.
W e do not dispute the bankruptcy courts finding that M r. W oody may have
underestimated some of his expenses. As part of the unforgivingly critical
assessment of a HEAL loan debtors expenses, In re Rice, 78 F.3d at 1151, the
court was required to carefully examine M r. W oodys budget, including whether
it realistically represented his actual needs. And it is of course well established
that the court has the ability to take judicial notice of such verifiable facts as the
rising price of gasoline. See York v. American Tel. & Tel. Co., 95 F.3d 948, 958
(10th Cir. 1996) (Judicial notice is appropriate w here a matter is verifiable w ith
certainty. (quotation omitted)). Thus, the bankruptcy courts finding that M r.
W oodys budget failed to include likely future expenses was within the purview
of the courts analysis and w as not clearly erroneous.
However, we differ with the bankruptcy court over the effect of this finding
on the unconscionability analysis. W hile M r. W oodys budget may fail to
account for future changes in his expenses an important factor to note the
fact remains that through at least the time of the bankruptcy proceeding, M r.
W oody managed to maintain his standard of living while making the payments
discussed above that we deem unnecessary. For example, though M r. W oody
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experienced some very lean years w hen his income was only a fraction of what it
is now, he has nevertheless managed to set aside enough money each month since
1990 to pay the rent for a space to store his unused furniture. Thus, although we
agree that M r. W oodys budget indicates that he is likely to face increased
financial strain in the future, we also interpret it as evidence that to date, he has
earned sufficient income to have made significant payments on his HEAL loan
obligations, had he chosen to do so. In other words, the fact that M r. W oody may
find himself in financial trouble in the future does not erase the fact that, in the
present and the past, his income and standard of living permitted him to make
loan payments.
5.

M r. Woodys responsibility for his debt and whether he made

good faith efforts to repay his HEAL loan debt

The final factor we consider is one to which the bankruptcy court gave
great weight: M r. W oodys good faith efforts to repay his HEAL loan obligations.
W e agree that a debtors good faith efforts at repayment over the life of his loans
are an important part of an unconscionability analysis. However, unlike the
bankruptcy court, we conclude that the record demonstrates that despite M r.
W oodys ability to make at least minimal payments, he made almost no effort to
do so. Thus, we cannot conclude that he has acted in good faith regarding his
HEAL loan obligations.

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The bankruptcy court acknowledged that M r. W oodys total contribution

towards repayment of his H EAL loan was a single payment of $484.48, made in
1987. The court also noted that M r. W oody never participated in any kind of
repayment program, making only sporadic attempts to initiate conversations
with loan representatives that never resulted in any concrete progress towards
repayment. Nevertheless, the bankruptcy court concluded that M r. W oody had
acted in good faith because his failure to meet his loan obligations was not borne
of any desire to abuse the system: despite reasonable efforts on his part, he was
unable to earn income sufficient to reasonably warrant any attempt at repayment.
Thus, the court concluded, [t]he equities of this case weigh in favor of M r.
W oodys good faith, and this Court will not condemn him because he is unable to
afford repayment of the obligation despite his best efforts.
However, the fact that M r. W oody is likely to encounter increased expenses
into the future does not change the fact that, in the past as well as at present, he
could have applied income towards his educational loans rather than, for example,
furniture storage. Had M r. W oody applied $125 per month since 1990 to loan
payments rather than furniture storage, he would have shown a significant effort
to repay his educational loan debts.
Under these circumstances, we do not agree that M r. W oodys minimal
efforts to repay his HEAL loan constitute good faith. The Rice and Smitley
courts define the good faith inquiry as focusing in relevant part upon the
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debtors financial situation over the course of time when payments were due, and
the debtors voluntary undertaking of additional financial burdens despite his
knowledge of his outstanding HEAL debt. In re Rice, 78 F.3d at 1150; Smitley,
347 F.3d at 118. Here, M r. W oodys financial situation since his HEAL loan
payments began to come due would have permitted some contribution towards
this obligation, yet M r. W oody instead chose to make voluntary payments towards
other expenses. Thus, the bankruptcy courts finding that M r. W oody endeavored
to repay his loan obligation in good faith is clearly erroneous.
D.

The totality of M r. W oodys circumstances does not permit

discharge of his H EA L loan debt

The above factors paint a picture of Mr. W oody as a man w ho has struggled
to earn a decent income for much of his life, but who has in recent years found
employment that utilizes his skills and provides him with a reasonable income.
He has lived a relatively frugal existence, but has also chosen to devote a portion
of his income to certain expenses that were not necessary to maintain his standard
of living. W hile he was aware of the significant debts he had accrued in
educational loans, he made very little effort to address these obligations and has
effectively allowed them to languish for more than two decades. M r. W oody no
longer need worry about the majority of these loans, as $53,000 in 523 loan debt
more than three-quarters of his total educational loan obligation has already
been discharged in bankruptcy. M r. W oody now finds himself approaching

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retirement age, making a decent income for the time being but concerned about
his lack of retirement savings and the potential for expensive health problems in
the future. He therefore requests that we affirm the bankruptcy courts discharge
of his remaining HEAL loan debt of approximately $18,750.
Under these circumstances in particular, M r. W oodys present level of
income and his lack of effort to make payments toward his educational loans
despite the apparent availability of funds from which he could have done so
nondischarge of his HEAL loan debt would not be excessive or exorbitant,
nor would it [lie] outside the limits of what is reasonable or acceptable, or be
shockingly unfair, harsh, unjust, or outrageous. W hile we do not doubt that
M r. W oody faces financial difficulty in the future based on his age, health, and
lack of significant retirement savings, we cannot ignore the fact that he has
gained steady, full-time professional employment and yet has failed to confront in
good faith the obligation that he assumed when he accepted a HEAL loan, a
failure that persisted even as he put away money for his own retirement and
undertook voluntary expenses such as furniture storage, union membership,
charitable contributions, and excess life insurance. In enacting the strict
unconscionability standard for discharge of H EAL loan obligations, Congress
intended to severely restrict the circumstances under which a HEAL loan could
be discharged in bankruptcy. In re Rice, 78 F.3d at 1148. W e do not think that
Congress intended the discharge provision in 292f(g) to allow a debtor to spend
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decades without making loan payments, even after having worked full time for
several years, then to receive a discharge of his HEAL loan obligations because
his health begins to fail as he approaches retirement age.
W e therefore hold that the totality of M r. W oodys circumstances do not
indicate that nondischarge of his HEAL loan debt would be unconscionable. The
BAP thus erred in affirming the bankruptcy courts discharge of this debt under
292f(g). W e REVERSE the bankruptcy courts and the BAPs judgments and
order M r. W oodys outstanding HEAL loan obligation reinstated.
C ON CLU SIO N
For the foregoing reasons, we hold that M r. W oodys circumstances do not
satisfy the strict unconscionability standard for discharge of HEAL loan
obligations under 292f(g). The BAPs opinion affirming the bankruptcy courts
discharge of M r. W oodys HEAL loan debt is therefore REVERSED, and M r.
W oodys outstanding obligation on this debt is reinstated. This matter is
REM ANDED to the BAP w ith instructions to remand to the bankruptcy court for
further proceedings consistent with this opinion.

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